In my previous article on Small Value Remittances, I highlighted the huge market potential of being able to make small value transfers, be it domestic or cross-border.
No one truly knows the market size for small-value payments, for there isn’t a true data set to which we can compare.
One can model this transaction set in many ways, but then again, it would just be an estimation. A very crude method of modeling is to look at your behavior with money. In a month how many small, medium and large value transactions do you do?
- Small: Less than $10
- Medium: $10-$100
- Large: Over $100
I myself have been tracking my spending habits and I found the following:
- Small: Over 50+ transactions per month
- Medium: Between 10-20 transactions per month
- Large: Less than 5
The above is give or take, what my friends spend as well.
Electronically speaking, I only do about 5-8 transactions per month – and they usually constitute the large transactions and a few medium transactions. The small transactions are not done electronically.
The Question of Small Value Transfers
Well, what if they could be electronically? What if I could spend small values and dispense them electronically. Assuming that is possible, I would love to do so. Saves me the trouble of going to the ATM and withdrawing cash, and hopefully being able to find merchants who would be able to accept small value transfers as seamlessly and in a frictionless manner as the cash-in-the wallet counterpart.
So why is it that I am not able to spend small amounts of cash – electronically? The answer wasn’t so easy to figure out. We all know about the limitations of the current payment systems, small values just aren’t viable to be made electronically? Why not? What is the limiting factor?
The answer wasn’t too difficult to spot, once I knew where to look for. It’s the system. Without sounding too clichéd – let me provide an analogous example.
Our Current Payment Infrastructure
The current monetary system of moving payments can best be thought of as moving shipping containers. A standard shipping container is 20 foot. It requires a truck of equal length to transport it. There are ships especially designed to haul the shipping containers. Derek and cranes to pick these containers up. Railway cars, designed to carry a shipping container, etc.
The entire infrastructure of transportation is designed to channel goods via a large value system, in which the shipping container fits perfectly well. For years, we have been very content with this setup.
This system is what we are accustomed to and are using flawless to this day. Is it time for it to change?
Changes in Payments Behavior
Slowly with the advancement of technology and time, our behavior changed. Our payment radius expanded. Not only were we making payments locally, we now were able to make payments globally, thanks to the Internet, which combined us all.
As the internet ecosystem built up, enabling us to communicate on a daily basis, near or far, suddenly borders and distances didn’t matter. Our communication interaction evolved. So did a lot many things on the Internet. Content evolved (think video?). The internet built-up an ecosystem of content, product and services where micro or small-value payments became a necessity. Yet, our payment system was still the same ol’ same ol’.
Even today, when so much has changed, our payment rails so to speak, are still the old fashioned shipping container. Now why does this matter? What is so wrong with the payment system that is riding inside of a shipping container?
So now, imagine trying to use the same example of the shipping container to do small payments, i.e. ship envelops. If one has to ship (i.e. transport) small value using the current infrastructure, it makes no sense. It would be an overkill. Think about the literal example of trying to post a letter via a shipping container?
Seems out of place doesn’t it?
The Payment System is Broken – It needs Fixing
That is exactly what the payment pundits of small-value transfers have been crying out loud. The system is broken when it comes to small value transfers.
When I hear bankers and payment specialists in the field who are complacent with the current payment rails and want to juxtapose small value transfers on to it, I don’t know whether to laugh or cry.
Trying to push small value payments within the current system just does not work. Its too expensive. Its an overkill. Classic case of Apples and Oranges.
Trying to push small value transfers on a system designed for larger payments, just makes the transfer more expensive. The system is macro, the need is micro.
Where does the solution lie?
So where exactly does the solution lie for micropayments? Not surprisingly, it lies in two areas:
- Wallets, and
- Bitcoin and related protocols.
Agnostic wallet I want to caution, offers a partial solution. The condition being that micropayments would be possible, provided, all transactions remain Wallet-to-Wallet, confined within the same eco-system.
The true methodology lies in investing and rolling out a payment system that is designed to handle micro and macro payments. Bitcoin, Ripple, Stellar, etc. are all designed to incorporate this.
What is surprising, is that many bankers or those associated with payments arena within banking have no clue about technologies like say Ripple, etc. They just don’t know about. Its like talking to chefs and making them discover salt for the first time. Imagine the impact.
It is high-time banking professionals learn to accept that alternate payment systems and payment rails are in play today. Not tomorrow, but today!
As they say, get with the program!